The intertemporal relationship between market return and variance: An Australian perspective

Warren G. Dean, Robert W. Faff

Research output: Contribution to journalReview articleResearchpeer-review

6 Citations (Scopus)

Abstract

In this paper we investigate the intertemporal relationship between the market risk premium and its conditional variance in an Australian setting. Using a bivariate EGARCH-M model combined with the dynamic conditional correlation (DCC) framework as proposed by Engle (2000), we find evidence of a positive relationship between the market risk premium and its variance and evidence of two distinct interest rate effects. Furthermore, while the bond market's own variance is not priced by investors, we find that the covariance between equity and bond markets is a significant risk factor that is priced in the market.

Original languageEnglish
Pages (from-to)169-196
Number of pages28
JournalAccounting and Finance
Volume41
Issue number3
DOIs
Publication statusPublished - Nov 2001
Externally publishedYes

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